Google (GOOG) and Apple (AAPL) are arguably the most popular companies in the U.S. and have made their long-term investors an incredible amount of money during the past six years. From the time Google went public in 2004, the stock has delivered a total return of 376% (as of September 22, 2010). During the same time period, Apple stock appreciated by approximately 1,770%. The two companies continue to dominate their respective sectors and are not surprisingly very popular with investors.
In this article, I will attempt to determine the fair value of the above mentioned companies using discounted cash flow analysis and relative valuation and present the possible upside for the two investments.
Company Fundamentals
| ||
Market Cap (Billions) | $163.64 | $259.24 |
TTM Sales (Billions) | $26.21 | $57.09 |
TTM Income (Billions) | $7.36 | $12.13 |
Net Profit Margin (TTM) | 28% | 21.4% |
20.5% | 32.66% | |
Return on Assets (TTM) | 17.8% | 21.93% |
Current P/E | 22.2 | 21.67 |
Current P/E (Peers) | 20.56 | 18.39 |
Current P/E (S&P 500) | 18.92 | 18.92 |
Previous 5 Year EPS Growth Rate | 69% | 91% |
Projected 5 Year EPS Growth Rate | 16% | 19% |
Projected S&P 500 5 Year Growth Rate | 11% | 11% |
LT Debt to Cap | 0% | 0% |
% Price Change YTD* | -17% | 37% |
* - Through September 22, 2010
As shown above, both the companies have healthy profit margins, no debt and are projected to grow faster than the broader market. Google is down 17% for the year while Apple is up 37% compared to the 2% gain of S&P 500 index.
The EPS estimates for the two companies are shown the table that follows:
| ||
TTM EPS | $23.03 | $13.28 |
2010 Average EPS Estimate | $27.10 | $14.45 |
2011 Average EPS Estimate | $31.32 | $17.61 |
My 2011 EPS Estimate | $29.72 | $17.08 |
Valuation
Discounted Cash Flow Valuation
DCF valuation of Google and Apple was performed by employing two-stage models with high growth period of 10 years. It should be noted that R&D expenses were capitalized for both the companies. The major inputs and the valuation results are presented below.
| ||
High Growth Period |
|
|
Bottom-Up Beta for High Growth | 1.33 | 1.39 |
Risk Free Rate | 2.75% | 2.75% |
Risk Premium | 6.5% | 6.5% |
Cost of Capital | 11.4% | 11.79% |
Growth Rate (Years 1-5) | 15% | 18% |
Average Growth Rate (Years 6-10) | 7.6% | 9% |
| ||
Stable Growth Period |
|
|
Bottom-Up Beta for Stable Growth | 1.2 | 1.2 |
Risk Free Rate | 2.75% | 2.75% |
Risk Premium | 6.0% | 6.0% |
Cost of Capital | 10% | 10% |
Growth Rate | 2.75% | 2.75% |
| ||
Valuation |
|
|
Present Value of FCFF in High Growth Period (Millions) | $69,910 | $116,178 |
Present of Terminal Value of Firm (Millions) | $72,163 | $141,998 |
Cash and Marketable Assets (Millions) | $30,059 | $24,088 |
Total Firm Value (Millions) | $172,132 | $282,464 |
|
|
|
Market Value of Equity/Share | $540 | $310 |
Relative Valuation
The estimated fair value using various relative valuation methods is presented below. It should be noted that the data from the last four financial years was taken in calculating the estimates shown in the table. However, since I believe that Google was overvalued during majority of the previous four years, greater weighting was given to multiples from the last two years.
| ||||||
Current | Estimate | Fair Value | Current | Estimate | Fair Value | |
P/E | 22.33 | 24.14 | $558 | 21.37 | 27.13 | $360 |
P/S | 6.25 | 4.68 | $386 | 4.54 | 4.37 | $272 |
P/FCF | 18.17 | 18.57 | $527 | 16.30 | 20.40 | $355 |
(P/E) / (P/E – Peers) | 1.09 | 1.22 | $580 | 1.16 | 1.26 | $307 |
(P/E) / (P/E – S&P 500) | 1.18 | 1.41 | $617 | 1.13 | 1.30 | $327 |
| Average | $534 | Average | $325 | ||
Fair Value and Price Target
Taking the average of my fair value estimates from DCF and relative valuation, the fair values of Google and Apple are $537 and $318, respectively. This implies that Google currently trades at a discount of 4% while Apple is undervalued by approximately 10%.
My 12-month price target for Google is $595 obtained by applying a multiple of 20 to my 2011 EPS estimate. This would result in a 15% return. My price target of $330 a share for Apple also implies a return of 15%. At these levels, Apple would be trading at a slight premium to its peers, but at a discount to its historical multiples.
(Kindly use this article for information purposes only. Please consult your investment adviser before making any investment decision.)
Disclosure: None
